Are Gold Gains Temporary? Investors Keep an Eye on the Fed



Fears of a Fed rate rise

The rise in gold prices in early 2016 could be temporary against an overall bullish outlook. Gold, silver, platinum, and palladium have risen 8.1%, 10.2%, 5.1%, and 3.7%, respectively, during the past month. The major contributing factor in the overall increase for these metals was the global uncertainty that extended from China as the new year began.

Investors are waiting for the Federal Reserve’s decision on whether or not interest rates will rise. The slowdown in the global financial markets has kept investors thinking about whether the four gradual hikes in 2016 will happen or not.

Goldman Sachs is forecasting that at least three out the four hikes will take place in 2016, raising rates to nearly 1.3% by year end. The rise in interest rates would adversely impact precious metals, as they are non-interest bearing.

Fed fear may continue to grip the markets if Goldman’s predictions hold true. Goldman expects gold’s price to end at $1,000 in 2016.

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Who is affected?

A rate rise would impact not only gold but also its other precious metals counterparts and precious metals–based investments such as the VanEck Vectors Junior Gold Miners ETF (GDXJ) and the leveraged Direxion Daily Junior Bull Gold 3X ETF (JNUG). These two ETFs have risen 18.3% and 55.6%, respectively, since the start of the year.

The fall in precious metals devastated mining companies in 2015. They could see yet another year of downfall if the Fed follows through with tightening its belt. Companies such as Royal Gold (RGLD), B2Gold (BTG), and First Majestic Silver (AG) lost considerable portions of their share prices in 2015.


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